Southern Cross Media Group (ASX:SXL) Could Be At Risk Of Shrinking As A Company

·3 min read

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Southern Cross Media Group (ASX:SXL), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Southern Cross Media Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.042 = AU$51m ÷ (AU$1.3b - AU$97m) (Based on the trailing twelve months to June 2021).

So, Southern Cross Media Group has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Media industry average of 6.7%.

Check out our latest analysis for Southern Cross Media Group

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In the above chart we have measured Southern Cross Media Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Southern Cross Media Group.

What Does the ROCE Trend For Southern Cross Media Group Tell Us?

There is reason to be cautious about Southern Cross Media Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.0% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Southern Cross Media Group to turn into a multi-bagger.

What We Can Learn From Southern Cross Media Group's ROCE

In summary, it's unfortunate that Southern Cross Media Group is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 77% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Southern Cross Media Group does have some risks though, and we've spotted 1 warning sign for Southern Cross Media Group that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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